The Michaels Companies announced financial results for the quarter ended October 31, 2015. Net sales increased by 3.4%, or 5.1% on a constant currency basis, to $1.2 billion.
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Net sales increased from $1.1 billion in the third quarter of fiscal 2014 and comparable store sales increased by 1.5% or 3.1% on a constant currency basis.
Gross profit decreased 20 basis points to 39.8% of net sales compared to 40.0% of net sales in the third quarter of fiscal 2014. The decline was driven by heightened promotional activity and a shift in product and service sales mix partially offset by an increase resulting from our pricing optimization effort and improved sourcing efficiencies.
The negative impact of foreign exchange rates was felt more this quarter as inventory was sold that had been purchased at higher foreign exchange rates earlier in the year.
Selling, general and administrative expense, including related party and store pre-opening costs (SG&A) as a percent of net sales improved 90 basis points to 26.5% versus 27.4% during the third quarter last year.
SG&A dollars remained flat at $309.7 million when compared to the third quarter of fiscal 2014 due to an increase in costs associated with operating 27 additional stores (net of closures) offset by good cost management, timing of marketing spend year over year and a decrease in Canadian operating costs due to the exchange rate.
Operating income grew 9.4% to $155.9 million from $142.5 million in the third quarter of fiscal 2014. As a percent of net sales, operating income increased 70 basis points to 13.3%. The total negative impact to operating income from the stronger US dollar was $10 million, or 90 basis points, in the third quarter of fiscal 2015.
Interest expense decreased to $33.8 million from $41.5 million in the third quarter of fiscal 2014 due to the early redemption of $360.9 million of the 7.50%/8.25% PIK Toggle Notes, funded with cash from operations, during the fourth quarter of fiscal 2014 and second quarter of fiscal 2015.
The effective tax rate was 37.0% for the third quarter of fiscal 2015 compared to 36.1% for the third quarter of fiscal 2014. The effective tax rate was lower in the third quarter of last year due to the carry over impact of initial public offering related expenses.
Net income increased 19.9% to $76.8 million in the third quarter of fiscal 2015 compared to $64.1 million in the same quarter last year. Diluted earnings per share increased 19.4% to $0.37 from $0.31 in the third quarter of fiscal 2014.
The Company opened 10 new Michaels stores and relocated four Michaels stores during the third quarter of fiscal 2015, compared with 19 new Michaels stores, three Michaels relocations, five new Aaron Brothers stores and one Aaron Brothers closure in the third quarter of fiscal 2014.
At the end of the third quarter, the Company operated 1,196 Michaels stores and 118 Aaron Brothers stores. ■